Warner: First challenge is State Question 640 [which states tax increases require supermajority in legislature or vote of the people]. You need to be sure you’re right before shrinking the tax base. Second challenge relates to state’s tax structure. I can’t be objective about income tax. Part of it goes to TRS and I’m a pensioner. Total state and local govt tax revenues in 2009 was $12B. most of that came from property tax, sales tax, income tax and gross production tax. If there’s anything we know, it’s that increasing property taxes is the kiss of death. We hate the property tax so much, we prohibited state government from having access to it. Municipalities are heavily reliant on sales taxes. OK has done well relying on these four tax sources. I’m afraid if we act on phasing out income tax, it will be one tax hate too many. We will be left with sales tax which we are over-utilizing and gross production tax. While I’m optimistic about oil and gas, I know there can be widespread swings in prices.

View of some is that we have to cut spending to only core services. Problem is determining what core services are. Believe pols in Washington will cut aid to states before cutting direct spending.

Principles of good tax system. The substitution of new revenue sources for ones being eliminated works if it increases revenue stability, increases revenue importation, improves equity and decreases cost of compliance.

Let me close with a pet peeve. Total state government expenditures in 2009 were 17.8B while appropriations were 7.2B. I wish people would stop referring to the 7.2B portion as the state budget.

Holmes: significant restraints exist for creating budget. SQ640 creates a ratchet on what can be done with taxes. There is one-directional movement on taxes: lower. Back in 30’s, state relied on property taxes, there was no income tax.

Gross production tax is not one to rely on. It’s always going to be volatile. Any kind of natural resource tax will have dramatic swings. Measure of a good tax is one that is stable as possible. You have very little latitude on what you can do. truth is, there’s precious little you can do. Can’t touch property taxes. Another constraint is tax competition. You’d be surprised how heavily municipalities tax themselves. The fact that cities are not allowed to use property taxes for operations – which grew out of the 30’s.

Tax equity is something you need to have in the back of your mind at all times. But equity is in the eye of the beholder. You can look at other places to see what their tax structures look like. OK doesn’t tax prescription drugs, but does on groceries. If you take groceries out of tax base, you would destroy local governments. If you’re in a small town with a Walmart, thank Walmart every day because they are funding your town through sales taxes.

The county only got the sales tax back in the 70’s and then only really Tulsa and Oklahoma counties with others added in after that. It’s now an important source because we’re asking counties to do more stuff and they’re limited to 10-mills on property taxes.

So we’ve got gross production tax which is volatile, sales tax that is competitive and property tax that can’t be touched. All that is left is income tax. It’s willful ignorance to suggest we abolish the income tax. If we did, there would be enough money to get roads paved, educate kids through the 6th grade and that’s about it.

My suggestion would be if we want to have smaller govt – smaller govt is fewer services, let’s not forget that. No one thinks there is $3-billion in waste. Find some agency and figure out what they should be doing and approach it that way. But to say “I don’t know who should starve and who should die and I don’t care, I’m turning the air off and some will die.” Is the wrong way.

Ideal tax system is a great academic exercise, but even if it was brought to you, you’d be incapable of implementing it. All you can do is nibble around the edges. It should be enforceable. Look at the tax books. I don’t know why I pay my taxes. People can lie like crazy. OTC needs to be given the tools to enforce it. If the cost of a bad act is high and the probability of getting caught is high and penalty is swift, fewer people will commit bad acts.

Sen. Mike Mazzei (participating by phone): in your opinion, is it easier to enforce and more efficient from a collection standpoint to tax activities through sales taxes or income taxes? Homes: personal income tax costs less to collect and probably has less cheaters because OTC can look at state income tax return compared to federal tax return. The sales tax has administrative costs paid to the companies that collect the taxes. Warner: sales taxes don’t apply to services, and we’ve shifted pattern of spending more towards services than goods. The idea of expanding sales tax to cover everything would be a tough political sell. Sales tax collections are increasingly poor indicator of economic activity.

Mazzei: you addressed in 2001 that services weren’t taxed and that should be an area of study and consideration if you wanted to eliminate income tax. From productivity standpoint, does taxing services inhibit productivity as some feel taxing income does. Holmes: any tax will alter a person’s decisions. A tax on income will change habits. We basically have a flat tax on income.

Rep. David Dank: I think it’s a disgrace that we tax groceries and not gravel pits. If we’re going to restructure this, we’re not talking about incentives and excesses. It seems to me we need to take a comprehensive view. Warner: it doesn’t take any work to change a rate. What you’re talking about will take work. We need to have courage to get in there and tear things apart. Holmes: property tax is a tax on wealth. If you hold your wealth in Monets or Van Goghs, you won’t be taxed, but if you hold your wealth in a house, you will. It represents a tax on past earnings. There are ways of dealing with the problem of property taxes on the elderly instead of eliminating property taxes altogether.

Dank: we never go back and correct anything. We take care of people from infants to prenatal to food stamps – which don’t pay sales taxes – so it’s kind of like we’re digging in sand. Warner: there are economists that think of property taxes as excise taxes.

Wright: a couple years ago there was a bill to equalize the gross production tax to make for a more stable funding source. I’d like to hear your opinion on that. Holmes: I’m going to take partial credit for a change in statute to correct part of that problem. Recognizing the volatility of the gross production tax, it created a special fund. It lasted only three years. It’s a good idea. But it was impossible to maintain it. There was always something that needed funding. Wright: we’ve heard we’d be competitive with other states if we reduced or eliminated the income tax. Warner: we have to be careful with that argument. One of your colleagues was extolling how states without income taxes were doing. Look at the overall productivities of those states (TX, FL, WA, TN). It’s fascinating that looking at gross state product, OK grew by 61%, FL 55%, WA 59%, TN 43%, TX 65%. So of the states, an absence of income tax is not something magic. I would urge you to visit with people who are specialists in attracting industry. Get them to discuss the frequency with which the issue of state income tax comes up. Holmes: making the income tax go away isn’t going to magically bring anything here. If you spend time w/ people who work in business relocation, some companies need access to water, others need transportation, income taxes are far down the list.

Coffee: all those states are in top 10 growing states, why is it unreasonable to assume having no income tax doesn’t have a role in that. Secretary Lopez says income tax is a factor. Warner: I don’t have a response to that other than my experiences with other experts have other opinions. It’s reasonable for someone w/ a high income to pay a lower income tax. I would suspect that what has gone on in OKC with the renaissance downtown and MAPS that it’s that activity which is 10-times more important than what you could get tinkering around with income tax.

Dank: until we get serious about exemptions, there is no answer to our problems.

Dr. Mickey Hepner, Dean of the College of Business Administration at UCO: economists tend to agree more than we disagree. One point of disagreement I have with previous issues include tax on intangible personal property. We should consider removing that from ad valorem tax because of different rates determined by different companies. The economy is evolving and the type of entities we have are changing. The economy transitioned from goods-based to knowledge-based and role of intellectual property is increasing. We need to be careful how we tax that property. One of my fears is that we create incentive for more dynamic companies to substitute out resources to other states that have lower tax.

Income tax is more than 35% of general revenue and significant source outside GR as well. Replace will either expand sales tax rate and/or base (OK is already a high sales tax burden state) would be problematic. We tolerate sales tax, we don’t like the income tax, but we really hate the property tax. Sales tax is a nickel or dime tax. Very few people actually know how much they’re paying in sales tax. Not transparent. Easier to fool the people. Income taxes we fill out a form and sign, but we pay that out over the course of the year, for the most part. Property tax is most painful because you get a big statement saying how much you owe every year.

We need to make sure we have a quality education system which is an economic development tool in itself. We have things like roads and children’s health care. Cutting services when we’re already low in tax burden would be problematic. I’m not certain eliminating income tax is advisable. I’m not certain eliminating income tax is panacea for growth.

Federal deductibility of income tax is an issue as well. Most Oklahomans get greatest benefit deducting their income tax. So if you reduce a deductible tax but increase a non-deductible tax, then you are increasing the federal tax liability as well.

The Institute on Taxation on Economic Policy looks at tax burden among income levels. In TX, the middle quintile pays a burden 3x higher than highest earners. Lower incomes pay 4x the burden.

I’m not a fan of eliminating income tax. I’ve never been a fan of the franchise tax. Puzzled by tax set up for privilege of doing business in the state. We have antiquated corporate income tax structure. For multi-state corporations, you have to identify what is earned in OK. Problem with traditional formula in determining that is moving jobs into the state results in higher income tax even though amount of total business done in the state hasn’t changed. Most states are moving away from that, putting more weight on sales in the state rather than payroll in the state as well. That kind of approach would be step in the right direction.

It’s difficult to have comprehensive tax reform. But there are minor and easy changes we can make that would have significant impact.

You will not generate enough money from increased sales taxes to offset the decrease in income taxes generated.

Dr. Noel Campbell, Associate Professor of Economics at Central Arkansas University: what I’ve heard from previous presentations has changed what I’m going to say. I don’t have the personal experience of Drs. Holmes and Warner. I’m going to come close to being willfully ignorant and negligent.

Taxes cannot be separated from spending. This must also be grand reform effort for spending as well. Taxes and spending are a train. Taxes are the cars, spending is the engine. Wherever the engine goes, the cars have to follow.

More spending on education does not bring equal return. There’s no evidence more public spending increases private activity. But the record of taxes on killing growth is clear. Every tax imposes an excess burden on the economy. The larger and more complicated the expenditure and tax system, the more difficult it is to determine what the future will look like, creating more risk. Let’s not attempt to discuss tax reform and spending reform as separate issues. They are the different sides of the same coin.

There are three components of excess burden: administrative cost by tax collecting entity which is actually a minor portion, compliance cost by citizens which is not small but is relatively small compared to, welfare cost which is the difference in the price paid by the purchaser compared to the provider. Excess burden can be very great.

As someone who might work or innovate in OK, the idea of ad valorem tax on intangible property scares me.

I suggest scrapping the BAT and franchise tax while keeping the corporate income tax.

The question presumes that OK is on its optimal spending path and that income tax is optimal tax to pay for the optimal situation. I can’t endorse that position. There are two paths to lowering a tax rate and achieving tax neutrality. One is to raise the rate on another tax or increase enforcement. But there is another possibility which is that decreasing the rate increases economic productivity. I don’t think all revenue could be recouped in sales tax, but increased spending will increase corporate taxes of the companies that provide the goods. Money saved rather than spent increases capital that can be borrowed.

By saying tax decrease has to be revenue neutral, we’re assuming that the level of government spending is the proper one. If you think govt is spending too much or not enough, then the idea of revenue neutrality is moot.

A number of states do well with no income taxes. OK should consider that as a possibility. The key is not whether income is taxed but rather what the tax system looks like. Personal income tax is likely to have a high compliance costs due to the number of taxpayers. Income tax codes are easily swayed to the advantage of a small group of individuals at the expense of the state. Increases costs of lobbying wars.

Eliminating income tax will increase innovation and entrepreneurship. Entrepreneurs can’t get traditional funding, so they have to rely on credit cards, family and friends so eliminating income taxes would add resources to their war chests. Majority of new jobs are created by new businesses, so giving people more control of their money might unleash new businesses in the state.

Ideal tax system is simple, transparent and robust. It would tax every dollar everywhere equally, would have low administrative costs and be relatively hard to undo.

The ideal change to current tax system will have transition costs. This means ideal change would have as much of existing tax collection structure as possible.

Dank: we’ve gotten to point where we have 52 college campuses that all have administrators, 62 career tech campuses, 526 school districts (most abuses in the eastern part of the state) how long can we continue to fund all this along with 77 counties? I’d like to have ideas on how to curtail these functions and services and schools. We’ve got to stop it somewhere. It’s not just exemptions and credits, it’s government spending. Until we do, I’ve told President Boren’s people we could fund them properly if we didn’t have all these campuses and career techs and school districts.